Are Vacation Homes Really Considered Investment Property?

Based on the Barry E. Moore and Deborah E. Moore v. Commissioner case that discussed the § 1031 exchange and focused on why a vacation home was not considered an investment property -- the following guidelines serve as potential evidence that the court will consider in support of an investment motive. This ruling affects whether a vacation home could be received as a "like kind" exchange or whether a subsequent loss on sale could be treated as a capital loss.

As a groundwork matter, the tax court accepted the fact that the petitioner hoped the properties in question would appreciate in value. “However, the mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence.”

To be an investment property the primary motive for acquiring the property must be an investment motive. In this case, the second residence was used by the Moore family for about four months of the year.

The tax court provided some clues as to what the Moores could have done to avoid this problem and what would have helped them in the claim that the properties were actually an investment rather than vacation homes. Guidelines were as follows:

  1. The property could have been rented; the tax court pointed out that the taxpayer did not make the property available for rent.
  2. The tax payer failed to claim any tax deductions for maintenance expenses or depreciation connected with the property.
  3. The court also mentioned the mortgage interest issue; if the taxpayer had been deducting the mortgage interest as an investment interest, the taxpayer would have had a strong argument as to the primary motive that he had when acquired the property.

Based on what the case has presented and discussed, this could be a good opportunity to further consider using some of those guidelines, or even all of them, to help in the classification of some properties as investment.

Some suggestions that might help:

  1. Make the property available for rent, even if it wasn’t rented. Advertise to show that there was an intent and effort to get the property rented. Consider renting out to family members for fair market value.
  2. Any maintenance or updates that are done to the property should be claimed as investment expenses. The mortgage interest deduction should also be deducted as an investment interest; combined, these efforts will prove that the intent of having the property is for investment purposes.
  3. Being able to present documentation or appraisals that show trends in appreciation of the property year after year is also helpful.

Every case and scenario provides different facts and analysis, but being aware of some of the guidelines or expectations of the courts can help in planning to classify a vacation home as an investment property.


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